Treasury Inspector General for Tax Administration
October 8, 2014
TIGTA - 2014-27
Contact: David Barnes
WASHINGTON – The Internal Revenue Service (IRS) needs to take additional actions to improve taxpayer compliance with a law related to the disposition of foreign investments in U.S. real property, according to a report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).
Congress passed the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to provide Federal tax rules for the sale of U.S. real property by foreign persons. The Deficit Reduction Act of 1984 imposed a withholding tax on the anticipated taxes due on any capital gain from the sale of a U.S. real property interest by a foreign seller. This is generally the only method that the IRS has to ensure the collection of any taxes on the capital gains resulting from these sales. Once the foreign seller and the sale proceeds leave the United States, it is difficult for the IRS to collect any delinquent taxes due. When this happens, the foreign sellers may be able to evade payment of taxes.
This audit was initiated as part of TIGTA’s Fiscal Year 2014 Annual Audit Plan and addresses the major management challenges of Globalization and Fraudulent Claims and Improper Payments. The overall objective of this audit was to determine the effectiveness of the IRS’s efforts in ensuring taxpayer compliance related to the disposition of foreign investments in U.S. real property.
“TIGTA found that there are some barriers for the IRS in ensuring the tax compliance of real estate sales transactions subject to the FIRPTA,” said J. Russell George, Treasury Inspector General for Tax Administration. “As such, the IRS cannot provide assurance that all foreign seller real estate transactions comply with this law.”
TIGTA’s review of Form 1099-S, Proceeds From Real Estate Transactions, real estate transaction data reported to the IRS revealed that there may be noncompliance with the FIRPTA filing requirements. TIGTA also found that the IRS did not always ensure compliance with FIRPTA filing requirements when a request for reduced withholding was filed and the FIRPTA withholding tax was still owed. In addition, TIGTA also identified various internal control weaknesses in the processing of 1) FIRPTA withholding payments and 2) FIRPTA withholding credits claimed by foreign sellers on their income tax returns. These internal control weaknesses resulted in the issuance of erroneous refunds and balance due notices.
TIGTA made several recommendations that will help improve compliance with the FIRPTA, including revising the Form 1099-S to more easily identify real estate transactions subject to this law and considering legislative/regulation changes to reduce barriers to effective administration of the FIRPTA. TIGTA also made several recommendations to improve controls over the processing of FIRPTA transactions.
The IRS agreed with four recommendations and indicated it had already addressed a fifth recommendation, which TIGTA was unable to verify. The IRS will apprise the Department of the Treasury of the recommendation pertaining to overcoming barriers to ensuring taxpayers comply with the FIRPTA. However, it did not agree to one recommendation intended to help it validate affidavits of non-foreign status. TIGTA continues to believe that the IRS should follow through on this recommendation.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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